Mistaken or misleading? Tax experts see both sides

Kathy Kristof is a personal-finance author and syndicated columnist.

The numerous errors on Timothy F. Geithner’s income tax returns had tax accountants debating Wednesday whether the missteps were innocent, cheating or simply the result of the overly complicated tax code.

Geithner’s political fate -- he is President-elect Barack Obama’s choice as Treasury secretary, putting him in charge of the IRS -- lies in balance. But it’s not an easy call.

Tax experts said that the issues that tripped up Geithner were complex enough to befuddle many taxpayers. If Geithner’s job for the International Monetary Fund had been conducted in another country, the income he earned would not have been subject to tax -- that’s a break in U.S. tax law for many American citizens who hold posts overseas. But because he worked for the IMF in the U.S., the taxes needed to be paid.

“It’s understandable that somebody who has this unusual job status would miss this [tax obligation], and that a paid preparer would too if they didn’t have a dozen other clients who worked for the IMF,” said Philip J. Holthouse, a partner with the Santa Monica tax law and accounting firm Holthouse Carlin & VanTrigt.


However, documents filed with the Senate Finance Committee also indicate that the IMF took pains to explain the tax situation clearly and give Geithner guidance on both the general obligation and the specific amount he owed.

Geithner appeared to heed this notification when it came to paying his income taxes, but he didn’t when it came to employment taxes, which are paid into the Social Security and Medicare systems.

“That makes it look more negligent than it would have otherwise,” Holthouse said.

When Geithner was audited for the years 2003 and 2004, the IRS levied additional tax and interest.


But examiners waived penalties, which indicates they concluded that the error was innocent, experts said.

The tax accountants did not fault Geithner for having made the same error on earlier returns and failing to correct the past returns -- and pay the additional tax due -- until he was nominated.

There was no reason for him to, said Elliott Kajan, a partner with Kajan Mather & Barish, a Beverly Hills law firm that specializes in tax controversy.

The only time a taxpayer would have to amend a return that was more than three years old is if he had vastly understated his income or had participated in tax fraud, Kajan said.


“There is no duty to go back and file an amended return when the statute of limitations has expired,” he said. “He acted like any other taxpayer confronted with this situation.”

When you are audited and agree to an adjustment on your return, you tacitly agree to not make the same error in the future, added Robert Schriebman, a tax attorney and tax controversy specialist in Rolling Hills Estates. But, he added, you are under no obligation to correct errors from the past.

Yet the idea that someone of Geithner’s economic savvy would be unable to accurately file his own return -- even with professional help in some years -- was seen as an indictment of the U.S. tax system.

“It speaks volumes about the impracticalities and uncertainties of our tax system that somebody who is considered a stellar nominee for the Treasury Department has struggled mightily -- and with professional help -- and still has trouble getting his own tax return correct,” Holthouse said.